Lets start with some words of wisdom from a man whose trading record makes him one of the modern trading masters.
“I’m only rich because I know when I’m wrong. I basically have survived by recognizing my mistakes.” G.Soros.
With these words in mind lets look at the price history here as most certainly market patterns do repeat and this is at the very basis of technical analysis itself.
We accept the 2007 market top was the classic technical topping out pattern across risk assets, for the world and sp500 indexes. But as we look at the sp500 price chart today we see the 2007 scenario is now an impossible pattern to reoccur today given the retrace we have seen across risk. There are too many sheds of evidence to list but some of the highlights would inc the retrace in correlating instruments likes the breakout by high yield and oil and basing patterns for the usd vs the jpy and euro. Beta equity indexes have started to play catch up and leads like the djt are within a whisker of confirming a continuation. The list is not complete yet but this therefore makes it the correct time to cross check.
Bears, like me, have used the correlating risk instruments as confirming that this recent Q1 weakness offered more than a simple correction and that the breadth of this risk off move likely confirmed a ending of the cyclical risk on bull. But as Soros rightly states as above we must always remain open to the possibility of the reversal being true.
Its a good question to ask of where and when we would have been wrong before in misjudging a correction for a top. Are there good historical precedents for correlating instruments to confirm risk off and then reverse where US indexes have maintained their composure or formation?
As we hopefully know all too well, Fitzpatrick, and some other technical writers, has long made the case that we face the 1997 to 1999 price patterns across world markets inc oil and commodities and that therefore this recent price action is a corrective period and not the cyclical bull top many have predicted. Whilst his case looked weak a month ago as oil and the US$ weakened further and HY broke down etc his case now looks much stronger.
Its certainly worth reconsidering this now again as the retrace across risk is becoming stronger that i and the Swiss team considered and many of the key components for confirmation are starting or have reversed.
What happened back in 1998?
We had a rising us$ alongside failing world growth inc the Asian crisis, which translated into a collapse in oil prices and commodities as well as bear markets across world indexes, couple of examples of ftse100 and nik225 below. Sound familiar? This is the basis of the case that Fitzpatrick and others make. We do appear to have an almost identical set of circumstances. (Also marked the low point in gold in this period with Brown infamously nailing the bottom of the gold price by selling half of the uk’s gold reserves in July 1999).
Here the economist looks at the macro/micro differences:
http://www.economist.com/news/leaders/21636742-world-economy-2015-will-carry-troubling-echoes-late-1990s-past-and-future-tense
Price wise, if we look closely at this period we see that the us$ went on to rise another 20% to its high mark several years later but that the rate of change in price was smoother and less steep than the initial rise and gold rise alongside the continued rise in the US$ NOTE!
The damage to credit markets was most acute on the initial rise not the later due to hedging etc and the policy makers reflation of world money supply against a back drop of limited spare capacity lead to the rapid over heating leading the 2000 collapse.
A few historical charts.
Here below the Sp500 back in 1997 to Oct 1999. We can see two clear topping distributions. They look very similar chart to the recent present. A pattern of weakness distributing and dropping below the 200dma. Bears at the time had started their party and on the basis of good evidence as the world economy topped out. But this was a complex topping distribution as policy makers held back the tide of problems.
I remember well as i went mainly to cash in 1998 and was forced to add back early the following year. I can recall at the time reading an article from the Economist entitled “The world economy flying on one engine, the US”. It was a frustrating investment period beset by 2 steps forward and then 2 steps back. The circle of winners perpetually shifted. In hindsight the best way to play this period was actually via the betas to play catch up. (Just like the recent price action btw).
It would be wrong to look at this chart in isolation to what policy makers did. Greenspan dropped rates and performed a huge liquidity injection via the banking sector pre y2k and the market reversed and took off like a rocket. The 2001 collapse infamous of course. From failed moves come fast moves. It was fast but it only put off the inevitable for 18 months or so longer.
As you look at this chart the probability points to a trend change and more lower lows and low highs to come. You would have been wrong, thanks to policy makers.
The ftse100 isn’t a bad conduit for global growth. The chart took a hammering in 1998. 1998 selling off 26% after a reasonable distribution. The sp500 as above never broke below her 200 dma though. From the 1998 low the ftse100 recovered quickly and made 10% higher highs a year later or 44% higher than the 1998 low. She proceeded to go higher again in 2000 & 2001. The nik2225 was even more dramatic and showed exactly the same set up as the ftse100. She sank an impressive 38% from her high in 1997 to the low in 1998. She went on to nearly double to the 2000 high which was a global high water mark.
Of course policy greatly assisted as the famous Greenspan put came into play.
Famously again forced to reverse his prior rate cut in 2001 and the nasdaq bubble collapsed. An unbelievable amount of private wealth and capital was flushed in the nasdaq collapse. Amazingly the banks avoided being affected.
Today
Some evidence of a weakening of the breadth inside the sp500 non confirming the recent action.Its mild stuff.
Ditto..
Wider small cap sp600 worse.
My point here is the sp500 remains very strong. It is the lead. We have sufficient breadth. We have a weak global pattern but indexes have jumped to levels that we have confusion now. Policy is also confused with the fed and others going in different directions potentially here. US liquidity should probably be a lead indicator here to monitor. Loan growth appears robust in Europe and the US. We can also see technically that we had a clear 1998 price moment. The stars aligned and the bear window presented. The pressure on risk was immense but US equity prices didn’t join. In military vernacular the line was held. The formation of US indexes, in this case, held. We have passed likely passed through the moment of greatest risk.
If Fitzpatrick is correct then he is right to beat the bull drum for copper and oil and gold. If we are off to new highs it should be an inflationary blow off top that the commodities will lead even as the US rises. This is precisely what occurred in the run up to the 2000/2001 top.
Here as a reminder Fitzpatrick’s recent comments on the similarities to the 1998 period.
cb-2-4-16 cb-wklytech-22-2-16
All the best
Rich
